Markets ignoring political risks

21 March, 2017

Markets were unmoved by yesterday’s political risk events. Donald Trump's job approval rating took a hit, declining to 37% according to the Gallup poll. The U.S. President took another hit from FBI director, James Comey who said no information supported his tweets contending that Former President Barak Obama wiretapped his campaign before the election. Meanwhile, investigations on Russia’s interference in the presidential election is ongoing.

These recent developments were totally ignored in financial markets, but the two-month-old new administration is already under pressure due to lack of clarity on tax reforms and regulation cuts. U.S. Senate Majority Leader, Mitch McConnell, believes getting tax reforms done, along with repealing Obamacare, will take longer than the Trump administration claims. This shows how slowly things are moving and may be only a matter of time until markets lose their patience and push the sell button.

The U.S. dollar continued to move on the back of Fed comments. Chicago Fed President, Charles Evan echoed Fed’s decision last week that the Central Bank won’t accelerate the pace of monetary policy tightening, but he also kept the door open for three rate hikes if conditions warranted. Dollar bulls wanted a more hawkish statement to rebuild long positions, but it doesn’t seem we’ll be getting one this week, suggesting that some consolidation and range-bound trading will resume unless a surprise occurs.

In Europe, Theresa May will officially trigger Article 50 on March 29, but formal talks may not start until June according to European sources. Yesterday’s GBP price action suggests that triggering Article 50 seems completely priced in, and I won’t be surprised if GBPUSD shoots higher on March 29. However, with the countdown set to begin on negotiating the terms of the breakup, Sterling will likely be on a roller-coaster. Today’s U.K. CPI release will remind us why BoE’s Kristin Forbes’s voted for a rate hike in last week’s meeting. Inflation is expected to shoot above the BoE’s target of 2% but I don’t expect much of a reaction unless the number deviates a lot from expectations at 2.1%.

The fight between populism and globalism was live in yesterday’s French presidential debate. EURUSD declared that centrist and former investment banker, Emmanuel Macron, won this round, as the currency pair shot higher. However, I suggest not to jump into conclusions given that 40% of voters have not decided whom to back yet, and we already learned a lesson from the Brexit vote and U.S. Presidential Elections.

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